An artist's concept illustrates a quasar, or feeding black hole, for NASA.
Getty
Morgan Stanley estimates that Britain will have to find an extra £98 billion ($122 billion) by 2020 to fund Brexit-related budget deficits and spending.

The investment bank expects Chancellor Philip Hammond to flag a big increase in UK government borrowing in next Wednesday's Autumn Statement.

Economists Jacob Neil, Melanie Baker, and their team say in a note sent to clients this week:

"We think the OBR's [Office for Budget Responsibility] revised forecasts will imply a cumulative £98 billion widening in the deficit and a cumulative £111 billion increase in government borrowing over the parliament."

Morgan Stanley's £98 billion estimate consists of a £80 billion hit to public finances as a result of lower than expected tax receipts and £18 billion of borrowing to fund economy-boosting investment in projects like HS2, HS3, Hinkley Point Nuclear Reactor C, and the new runway at Heathrow.

The worsening state of public finances — what Morgan Stanley expects the new deficit forecasts to be.
Morgan Stanley
Morgan Stanley says their £98 billion deficit widening is, in fact, a relatively conservative estimate, saying:

"On our own more pessimistic growth assumptions, we would expect the cumulative deficit to increase over the parliament by £117 billion in the base case and by £160 billion in the stimulus case."

Morgan Stanley's Neil and Baker blame the expected deterioration in finances on "the Brexit drag, an ageing population, and lower migration." They expect the government to lower growth forecasts in line with the Bank of England, predicting a slowdown in business investment as a result of uncertainty surrounding Brexit.

Neil and Baker add that public finances have already got worse since the March 2016 budget — the deficit is veering off target for 2016, with the OBR admitting Britain is unlikely to hit its forecast reduction this year.

To combat the expected growth slowdown, Morgan Stanley expects "modest" fiscal stimulus not be announced at the Autumn Statement, forecasting £4 billion of investment for each year of the current parliament.

The investment bank says: "Brexit looks like it will be a protracted drag on demand - particularly business investment - rather than one sudden defining shock, like the Lehman bankruptcy. This extended timeline, which we see as likely to last to the end of the decade, if not longer, means slow-moving fiscal policy is more able to respond than it would to a sudden crisis."